What investors need to know for effective decision-making

Introduction

This Thought Leadership Narrative was designed to be provocative. Its express purpose is to provoke investors and trustees into thinking more for themselves: about the funds they oversee and the responsibilities they have to ensuring that those funds address the specific goals that they need to achieve. Some people will see this narrative as reflecting ideas that are “not within the grasp of the average Trustee or investor”. We, however, are believers. We believe that when properly informed and assisted, members with little financial background are quite capable of arriving at a far clearer understanding of what is “right” for their goals than many might anticipate. We believe that the real dilemma that investors face relates not to a capacity for understanding but to a paucity of informed advice.

What Investors Need To Understand About Investment Decision-Making

Most investor education programs do little to take investors beyond a textbook understanding of investments and the associated jargon. This leaves investor – both the lay investor and the professional, particularly vulnerable to either the marketing prowess of the asset management companies, or the seemingly definitive rankings reflected in the performance surveys. Neither serves the fund’s best interests. What this narrative attempts to introduce are some reality-based insights into what really counts in terms of their effective stewardship. It aims to shed light on what their expectations should be of their advisers and their asset managers. And it hopes, above all, to provide investors with the conviction and the confidence that they need to assume control of the process that determines what is best for meeting their goals.

Learning how to be an effective investment decision-maker is a dynamic process. It demands that the participant stay in touch with the latest insights. Typically, these insights have more to do with understanding what really is driving performance outcomes (most often, very little that the asset manager can control) than it has to do about having insights into economic conditions in the world or the proper valuation of markets. Ironically, when asset managers do get it right, it may have less to do with getting the “numbers” right and more to do with understand what the market participants think are the right numbers. That’s why understanding human behaviour may be one of your best skill sets. Think of your world class poker players – it’s as much about intuiting how the other players will respond as it is about it is about knowing the odds of your hand winning.

But if that makes investing sound like a total crapshoot, then what we want this narrative to achieve is to show you how strategies can be structured that have a high probability of meeting the outcomes you require. You just need pay less attention to the hype around investing and more attention to what realistically can be achieved. The answer to that is “quite a lot” – but perhaps not by doing what you thought you should be doing.

The pages that follow are hardly an exhaustive study of the subject. Don’t get put off by the dates when specific articles have been written. Some articles reflect insights that will withstand the test of time. Where we need to keep you up-to-date with the research, will make sure we include those articles.

We have only just begun the analysis. But we are indebted to our clients, our colleagues and our competitors for stimulating the discussion and providing us plenty of ammunition for an on-going debate on a thoroughly dynamic subject. We welcome inputs from one and all.